Insurance industry hails proposed SIFI authority elimination

A U.S. House of Representatives bill that would eliminate the ability to tag insurers as “too big to fail” and would refocus a federal regulatory agency on international insurance talks is largely positive for the insurance industry, according to experts.

The Financial CHOICE Act, the Republican-developed alternative to the Dodd-Frank Wall Street Reform and Consumer Protection Act, was introduced last week by Financial Services Committee Chairman Jeb Hensarling, R-Texas. A bill markup has been scheduled for Tuesday.

“It’s very much a positive,” said Robert Gordon, senior vice president, policy research and international regulation for the Property Casualty Insurers Association of America in Washington, citing an organizational study that determined its members experienced a 19% increase in regulatory compliance costs over the last two years.

“We’re seeing that impact the competitive marketplace, really choking off a lot of competition,” he said. “It’s particularly having a negative impact on the smaller community insurers who end up having to pay several times the percentage of their revenue in compliance costs. The CHOICE Act does a very good job of rebalancing the Dodd-Frank Act’s economic protection with reducing the harmful and costly big government regulations that don’t have as much consumer benefit.”

The bill would eliminate or revise several features of Dodd-Frank, including retroactively repealing the authority of the Financial Stability Oversight Council to designate firms as systematically important financial institutions, or SIFIs.

“We don’t think insurance companies are inherently systemic,” said Wes McClelland, vice president for federal affairs for the American Insurance Association in Washington. “We think the CHOICE Act goes in the right direction there.”

The FSOC currently has the power to designate financial institutions as SIFIs subject to heightened capital requirements and reporting rules. In July 2013, the council voted to designate New York-based American International Group Inc. and Norwalk, Connecticut-based General Electric Capital Corp. Inc. as SIFIs, with Newark, New Jersey-based Prudential Financial Inc. also designated as a SIFI in September 2013.

In December 2014, the council voted to designate New York-based MetLife Inc. as a SIFI, but the insurer won a court challenge against the designation in March 2016 — a decision currently under appeal by the government. In June 2016, the council voted to rescind GE’s SIFI designation after the company changed its business by divesting assets and changing its funding model.

While only a limited number of insurers have been tagged SIFIs, removing the FSOC’s ability to designate insurers is a high priority for PCI, Mr. Gordon said.

“It’s something that concerns a lot of our members beyond those being dragged into it because of the threat and the influence of the Federal Reserve Board taking over large portions of insurance regulation,” he said. “One of the things that the U.S. state-based insurance system has been fighting against, both in the evolution of Dodd-Frank Act, but even more so on the international stage, is this increasing dominance of bank regulation and the bank regulatory model being imposed on insurance. They’re really fundamentally different industries. Bank regulations designed to prevent a run on a bank and to make sure the holding company can be a source of strength to the banking units … there’s never been a run on a property/casualty insurer. The problem the bank regulation is designed to address just doesn’t exist in the property/casualty industry, so you’re creating this incredibly expensive regulatory system and trying to impose something that isn’t really needed or isn’t an appropriate solution.”

The National Association of Insurance Commissioners, which has been concerned about federal encroachment on the U.S. state-based insurance system, firmly rejected the proposal’s creation of an Independent Insurance Advocate that merges the Federal Insurance Office with the FSOC’s independent member and instead urged legislators to eliminate the FIO, deeming both “unnecessary.” The National Association of Professional Insurance Agents has taken a similar stance.

But other stakeholders doubted that the CHOICE Act would eliminate the FIO, even as it seeks to revamp and refocus the agency.

As written in the proposal, FIO’s main focus will be “the international coordination piece, which we think is needed because the states are not constitutionally able to negotiate any kind of international insurance agreement,” Mr. McClelland said.

“I think there’s a really slim chance there will be a movement to get rid of FIO,” he said.

The general expectation is that the current bill will make its way through the House but could run into challenges in the U.S. Senate, where 60 votes would be needed for adoption.

“I think there’s general support for the provisions of the bill on the Republican side,” Mr. McClelland said. “On the Democratic side of the aisle, there’s pretty unanimous opposition to the bill. There’s definitely going to be some headwinds, but it’s the chairman’s prerogative to try to move forward with his policy.”